If you’re in the market to buy or sell your home, it’s natural to wonder how this process may affect the other real estate transaction you are also considering. Should you sell your current home before buying a new one? Should you buy your new home first and then move into it, or should you take on both transactions at once? To help you weigh the pros and cons of each approach, we’ve created this helpful guide, which breaks down the main considerations and offers advice on what to do if there are special circumstances in your life that might make one option more appropriate than another.
When it makes sense to sell your home before buying
Buying a new house and moving into it before you sell your current one is the best scenario from a moving perspective. Having an empty old house makes showing it much easier since you wouldn’t have to deal with dishes or unmade beds in the morning.
You might also feel less overwhelmed if you handle the transactions at different times.
Plus, if you have to wait to sell your home until you’ve closed on your new house, you could end up paying two mortgages at once. That can get pretty expensive fast! If that sounds like it would be too financially stressful for you, selling before buying might make sense.
How much time you need to give yourself
You cannot predict the amount of time it will take to sell your current home. If you sell your current home and find a new one soon after, you may be able to close both deals on the same day. You have to remember that other parties involved in the transactions have their own needs and schedules, so you might not be able to get this done. If closing on a specific date is of high importance to you, you can offer incentives to the other party to make this happen.
You could offer an above-market price for their home or pay for some or all of the closing costs. Whatever you do, though, expect that there are no guarantees with any of these strategies. If you don’t want to risk waiting too long and having to change your mind about buying a new house, ask the real estate agent about homes that are currently available for sale before looking at houses that might become available soon through other means (such as foreclosures).
What documentation and preparations are required?
Establishing a Sales Price
Your current home may sell for less than you expect. If you buy a new house based on the amount of money you think you will get for your old one, but you wind up with less than that, you may struggle to afford your new mortgage.
Purchasing a new home before selling your old one may make sense if you’ve paid off your current home or paid cash for it, because you won’t have to worry about doubling your loan payments.
To get a more accurate idea of what your home is worth, you will want to include any ongoing maintenance or renovations you may do as part of your plans. If you want to add some new kitchen cabinets before you put your house on the market, that will cost you some money upfront.
Loan Qualification
There may be difficulty in being qualified for a mortgage to buy a new house. A lender will determine whether or not to approve an application based on your debt-to-income ratio. If your DTI is too high, you might not be able to qualify for a mortgage or you might have to take out a higher-interest mortgage. You may also not have enough cash for a down payment or expenses for two properties.
If you aren’t able to get approved for a mortgage loan, you may want to consider renting an apartment while your current home is on the market. Keep in mind that if you live in an area with limited rental options or high prices, or if your situation is time-sensitive, buying before selling could leave you with nowhere to live. If there are reasons why renting first would be impossible for you, then it may make sense to buy your new house first.
Alternatives to Paying Two Mortgages
Renting out Your Home
If your house has been on the market for months but you haven’t found a buyer, you might have more success renting it out. Renting out your home can provide you with a stream of income to cover your existing mortgage so you won’t get in over your head when you begin making payments on your new home. If you’re considering renting out your home, you can either rent the property for a few months until you receive an offer or find a long-term tenant.
Home Equity Line of Credit
Another option is to use a home equity line of credit to access cash. You may be able to get enough money to cover your new mortgage payments for several months until someone buys your old home. If you don’t find a buyer, however, you run the risk of using up too much of the equity in your old house, not being able to make the HELOC payments and winding up in foreclosure. You also may not be able to open a HELOC while your house is on the market. This may only be an option if you have an existing HELOC.
Bridge Loan
So that’s where a bridge loan comes in. A bridge loan is a short-term loan that will provide a homeowner with the money to buy that new home before they sell their current one.
Also known as a swing loan, gap financing, and interim financing, a bridge loan will “bridge” the gap between the time the new property is purchased, and the old house sells, allowing borrowers to access the equity in their existing home for a down payment.
Interest on a bridge loan is typically calculated as simple interest and is paid upfront for six months, keeping someone from having to make two house payments at once. While most bridge loans in these cases are from three to six months, they can be extended by a year depending on the lender you are working with.
Unfortunately, bridge loans usually carry an interest rate that’s roughly two percent above the average fixed-rate mortgage and come with equally high closing costs.
A bridge loan is one of the fastest ways to get the money you need while keeping you from having to accept a bad offer that comes in on your home. You can wait for your price to be met and still move into your new home.
Structuring Your Purchase Contract
There’s always the fear that your house won’t sell, and you could be stuck with two properties far longer than you want. If you’re working closely with your real estate professional, however, and setting a fair price, you shouldn’t have any issues. Here are two more ways that you can put yourself in a better position.
Contingency on Sale
If you find the perfect new house while your current home is still on the market, you can make an offer to buy the new house contingent on the sale of your old one. That can give you time to find a buyer for your old home before closing on the new one. If you don’t find a buyer in time, you can extend the timeframe or cancel the deal. This is risky from the perspective of the party selling the house you want to buy. Be aware that many sellers won’t accept those terms, but it can’t hurt to ask, so don’t be surprised if the answer is no.
Leaseback Option
If you sell your current home and know that you’ll be moving into a new house shortly, the buyer of your old home may agree to rent that house to you for a short period of time. The buyer’s willingness to do this will depend on his or her own schedule.
Buying and selling homes at the same time does make the process more difficult. There are many unknowns that can influence the course of events.
If you have any questions, or you want to start a dialogue, let’s talk about your options. Good decisions aren’t always made when strong emotions are in play.
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